The implementation of Basel III standards across Asia has placed more pressure on public sector institutions, such as the ADB, to ensure Asia’s exporters retain their access to short-term credit. Alongside an expanding trade finance scheme for banks, a supply chain finance facility aims to improve liquidity for corporations.
Missing links
Source: REUTERS/Erik De Castro
Workers try to locate illegal cable television connections from overhead wires inside a subdivision at Paranaque, Metro Manila.
Trade finance has become a priority for the ADB in recent years, as an initiative that encapsulates its “finance plus plus” strategy. As well as providing its own direct guarantees, the ADB leverages its resources through co-financing and risk-sharing agreements, and uses its knowledge and research to help global financial institutions get comfortable with increasing their exposure.
“There is a very clear link between trade finance and job creation, and that makes it an obvious fit within the ADB’s mandate to reduce poverty,” said Steven Beck, head of the ADB’s trade finance programme.
Beck’s department completed 2,120 deals in 2013, involving US$4.03bn of trade, up slightly from US$3.9bn in 2012. The programme provides an ADB guarantee to cover the risk of a local Asian bank failing to honour its obligations under a letter of credit, helping global lenders overcome any concern about local counterparty risk.
“There is a very clear link between trade finance and job creation, and that makes it an obvious fit within the ADB’s mandate to reduce poverty.”
“Demand remains high,” said Beck. “Conditions have eased since the financial crisis, but that was not the core reason for these gaps. Low country ratings, political instability and a lack of information continue to be hurdles.”
In part to address that lack of information, the ADB sponsored a global survey in 2013 that pointed to a US$1.6trn gap in global trade finance, with US$425bn of that unmet demand in Asia. Its research efforts have also demonstrated an exceptionally low default rate in trade-related financings, helping global banks – and regulators – review their stance on emerging-market trade risks.
Next stop: Yangon
The trade-finance programme concentrates on the less-developed countries under the ADB’s remit. Beck’s department covers 18 countries and is about to expand the initiative to Myanmar.
A second round of due diligence studies is under way on nine Myanmar banks and the first ADB-supported letters of credit cannot be far off. One lender has already passed the tests, paving the way for coverage to begin once the ADB board signs off.
“The ADB is designed for this. We go in first, help establish a track record and, then, the private sector can follow,” said Beck. “There is a huge amount of excitement around Myanmar, but international lenders are not ready yet.”
Trade in Myanmar is conducted almost exclusively on a cash basis, an outdated and inefficient system that falls far short of international standards.
Hopes are high that trade volumes will grow quickly once the country’s banks are formally admitted to the ADB scheme – both within the bank’s own programme and in the global market. An ADB stamp of approval will help give other lenders confidence to accept Myanmar credit.
Corporate credit
While the trade-finance programme has been growing rapidly in recent years, it deals only with banks and, therefore, risks leaving out some of the Asian companies, which can benefit the most from access to credit.
As such, the ADB’s latest initiative is a supply-chain facility, which takes on corporate risk and aims to help local SMEs that may not be able to access bank financing.
Under the programme, the ADB advances payment to a local exporter only after a major corporation has accepted its goods – an arrangement often referred to as reverse factoring.
The SME exporter receives payment without having to wait for the customary 60 or 90 days, allowing it to reinvest in filling its next contracts, while the ADB’s credit risk is on the buyer, typically a major western organisation.
The ADB expects the first disbursements under the supply-chain-facility scheme in the second half of 2014, and that it will facilitate about US$800m of trade over the next three years.
One key difference from other ADB programmes is the presence of a private-sector partner. The first, Standard Chartered, signed up in late 2013 and a second is to come on board soon.
“Dealing with SMEs requires a massive local network for due diligence and monitoring. So, we need to bring in local lenders to make that happen,” said Beck.
The structure of the supply-chain facility also promotes financial inclusion, since most of the SME exporters will have never worked with banks before. That serves both the ADB’s development mandate and private-sector growth ambitions, since banks are increasingly looking to the SME sector to boost margins.
To see the digital version of this report, please click here.
